Oil closes under $49 at five-week low

Natural gas sinks 6% on heels of weekly U.S. storage data

SAN FRANCISCO (CBS.MW) -- Crude-oil futures dropped 4 percent Thursday to close under $49 a barrel for the first time in five weeks, pressured with what's been a six-week string of increases in U.S. crude inventories.

Conflicting reports over the health of Palestinian leader Yasser Arafat also contributed to oil's price decline, with traders mulling exactly what effect the loss of Arafat would have on the Middle East.

Crude for December delivery fell to a low of $48.77 a barrel on the New York Mercantile Exchange before closing at $48.82, down $2.06 for the session. On Wednesday, prices closed with a nearly 3 percent gain, but not before trading at a five-week low of $48.65.

December heating oil shed 5.17 cents, or 3.6 percent, to close at $1.3721 a gallon, while December unleaded gasoline closed at $1.2774 a gallon, down 5.03 cents, or 3.8 percent.

"In the past two weeks, crude oil has reversed on the premise it has answered the two main factors of what was driving the rally: supply concerns and uncertainty," said Michael Cavanaugh, an analyst at MyFuturesOnline.com.

On Wednesday, the Energy Department reported a 6.3 million-barrel increase in the nation's crude stocks for the week ended Oct. 29. "That answers the supply factor, for now," said Cavanaugh. The total climb in crude supplies for the past six weeks tops 20 million barrels. See the full story on supplies.

And "Bush getting re-elected helps with the uncertainty factor," he said, though "at this point, it is too early to say if this is good or bad for oil."

Bush debate

Cavanaugh, however, believes Bush's re-election should have "little to no impact on the oil" because the "only thing that was cleared up in the uncertainty issue is that [Sen. John] Kerry wasn't elected and who knows what he would have done with Iraq, or foreign affairs in general."

On the other hand, now that Bush has gotten voters' approval for a second term, "he will likely continue filling U.S. emergency oil stockpiles despite high prices," said John Person, president of National Futures Advisory Service.

"His re-election will stoke nerves about U.S. policy in the Middle East, particularly OPEC's second-biggest producer, Iran," he said.

Added to that, Kuwait has delayed a planned increase of 200,000 barrels per day in its output capacity. "Obviously this move will potentially prolong the fear of global shortage supply capacity, which has already sent prices to record highs," said Person.

And fresh worries over production from Russian oil giant Yukos
YUKOF
surfaced Wednesday, following news that it will hold a special shareholders meeting Dec. 20 to discuss the possible liquidation and bankruptcy of the company.

The company, which produces more than 1.6 million barrels of oil per day and accounts for about 19 percent of Russia's total output, suffers from a total tax debt of around $17.6 billion, according to the Associated Press.

Middle East factor

News reports on Arafat's health contributed to pressure on oil Thursday, said Phil Flynn, a senior analyst at Alaron Trading, with the assumption that the leader's passing would "raise hopes of a potential peace deal down the road."

A Palestinian spokesman and a French military spokesman have denied that Arafat has died, according to Agence France-Presse reports. Earlier, Israeli media reported that he had died. Arafat had been in intensive care at a French military hospital in the Paris area.

If Arafat were to pass away, "it would allow some stability and open the door for a new leadership in Palestine," said National Futures' Person.

Even the thought that Arafat may be dead "led traders to speculate that without him, we could move forward with the peace process in the Middle East," said Flynn.

But "that country has not been an issue regarding oil production in the Middle East, especially since the U.S. invasion in Iraq," Person said.

"The market right now is centered on overall Middle East policy with the re-election of President Bush and further avenues of supplies for global consumers," he said.

Winter factor

For now, "world production is currently adequate as long as the weather remains mild, but this winter could strain inventories again," said Todd Hultman, president of Dailyfutures.com, a commodity information provider.

Moreover, "there are still several potential problems that could erupt at any moment: terrorism in Iraq and/or Saudi Arabia, the dissolution of Yukos in Russia, civil war in Nigeria, and political instability in Venezuela," he said.

At the same time, the U.S. and world economies continue to grow, boosting oil demand along the way, he said.

From here, "the one surprise that could bring prices down $10 a barrel is if Northern Hemisphere temperatures would stay mild for two months," but otherwise, "spot crude appears well-supported in the low-$50s with chances for big upward spikes this winter," Hultman said.

Natural gas sinks 6%

Elsewhere on Nymex, natural-gas futures closed with a more than 6 percent loss, pressured by a bigger-than-expected increase in last week's supplies, as well as weakness in oil.

December natural gas closed at $8.199 per million British thermal units, down 55.3 cents for the session.

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